Debt

9 Months Ended

Sep. 30, 2023

Debt Disclosure [Abstract]

Debt

Debt

The following table summarizes the Company’s debt (in thousands):

	September 30, 2023		December 31, 2022
JPMorgan Term Loan, current portion	$	—	$	24,375
Unamortized debt issuance costs	—		(302)
DNI Related Party Loan	29,291		—
Long-term debt, including current portion	29,291		24,073
JPMorgan Revolving Credit Facility	—		4,000
Bank and Trade Facilities - Foreign Operations	11,065		—
DNI Related Party Loan	—		5,706
Short-term debt and credit facilities	11,065		9,706
Total Debt	$	40,356	$	33,779

Related Party Debt

On October 31, 2022, DNS Korea, the Company’s wholly-owned subsidiary, entered into a Loan Agreement with Dasan Networks, Inc. ("DNI") (the “November 2022 DNI Loan”). The November 2022 DNI Loan was negotiated and approved on behalf of the Company and its subsidiaries by the audit committee of the Board of Directors of the Company which consists of directors determined to be independent from DNI. The November 2022 DNI Loan consisted of a term loan in the amount of KRW 7.2 billion ($5.0 million USD), with interest payable monthly at an annual rate of 6.0%. The entire outstanding balance on the November 2022 DNI Loan was repaid in the first quarter of 2023.

On January 31, 2023, DNS Korea entered into another short-term loan arrangement with DNI (the “February 2023 DNI Loan”) and borrowed KRW 5.0 billion ($4.1 million USD), with interest payable monthly at an annual rate of 7.0%. The entire outstanding balance on the February 2023 was repaid in the second quarter of 2023.

On May 12, 2023, DNS Korea entered into another short-term loan arrangement with DNI (the “May 2023 DNI Loan”) and borrowed KRW 4.0 billion ($3.0 million USD), with interest payable monthly at an annual rate of 7.0%. The entire outstanding balance on the May 2023 DNI Loan was repaid in the third quarter of 2023.

On September 12, 2023 and September 22, 2023, DNS Korea entered into two long-term Loan Agreements (the “DNI Loan Agreements”) with DNI, as lender, DZS California, Inc., a California corporation, as collateral provider, and DZS Inc. Pursuant to the DNI Loan Agreements, DNS Korea received two three-year term loans in an aggregate principal amount equal to KRW 39.6 billion , the equivalent of $29.9 million as of the date of the transactions. The net proceeds under the DNI Loan Agreements were used to repay the outstanding obligations under the JPM Credit Agreement, and the JPM Credit Agreement was terminated on December 14, 2023.

The obligations under the DNI Loan Agreements are secured by liens on certain assets of DNS Korea (the “Collateral Assets”) and on 9,999,999 shares of the common stock of DNS Korea held by DZS California (the “Pledged Shares”). Collateral Assets included inventory of KRW 85.7 billion ($63.5 million USD) in its Janghowon warehouse, which should be maintained at a minimum of KRW 35.0 billion ($25.9 million USD), and account receivable for two certain customer in the amount of KRW 16.2 billion ($12.0 million USD).

The Loan Agreement contains certain financial covenants, including requiring DNS Korea to maintain (i) a maximum Leverage Ratio (as defined in the Loan Agreement) of (a) 6.00 to 1.00 at the end of each of the second and third quarter of 2024, (b) 5.00 to 1.00 from the fourth quarter of 2024 through the second quarter of 2025 and (c) 4.00 to 1.00 from the third quarter of 2025 until the DNI Loan is repaid in full, (ii) cash of at least KRW 1.3 billion and (iii) a combined total of cash, accounts receivable and inventory of at least KRW 33.0 billion.

In addition, the Loan Agreement contains various covenants that limit the ability of the Company, DNS Korea and DZS California to, among other things, (i) grant liens on the Collateral Assets to any third party, (ii) sell, donate, pledge, provide as collateral or otherwise dispose of the Pledged Shares to any third party, (iii) incur or assume indebtedness, (iv) make loans to affiliates or (v) engage in certain other transactions or make certain other fundamental changes.

The Company's debt obligation under the DNI Loan Agreements was KRW 39.6 billion ($29.3 million USD) as of September 30, 2023.

Bank and Trade Facilities - Foreign Operations

DNS Korea has entered into various short-term financing arrangements with foreign banks and other lending institutions consisting primarily of term loans and trade facilities. As of September 30, 2023, the Company had an aggregate outstanding balance of $11.1 million under such financing arrangements.

Industrial Bank of Korea Loan

On March 30, 2023, DNS Korea entered into a Loan Agreement with Industrial Bank of Korea (the “IBK Loan”). The IBK Loan consisted of a short-term loan in the amount of KRW 1.2 billion ($0.9 million USD) with interest payable monthly at an annual rate of 6.3%. The entire outstanding balance on the IBK Loan was repaid in the second quarter of 2023.

Shinhan Bank

On June 15, 2023, DNS Korea entered into a Loan Agreement with Shinhan Bank (the “Shinhan Loan”). The Shinhan Loan consisted of a short-term loan in the amount of KRW 6.0 billion ($4.7 million USD) with interest payable monthly at an annual rate of 5.2%. The Company's debt obligation under the Shinhan Loan was KRW 6.0 billion ($4.4 million USD) as of September 30, 2023.

Kookmin Bank

On July 31, 2023, DNS Korea entered into a Loan Agreement with Kookmin Bank (the “Kookmin Loan”). The Kookmin Loan consisted of a short-term loan in the amount of KRW 2.0 billion ($1.7 million USD) with interest payable monthly at an annual rate of 5.8% The Company's debt obligation under the Kookmin Loan was KRW 2.0 billion ($1.5 million USD) as of September 30, 2023.

Hana Bank

On August 17, 2023, DNS Korea entered into a Loan Agreement with Hana Bank (the “Hana Loan”). The Hana Loan consisted of a short-term loan in the amount of KRW 2.0 billion ($1.5 million USD) with interest payable monthly at an annual rate of 5.9% The Company's debt obligation under the Hana Loan was KRW 2.0 billion ($1.5 million USD) as of September 30, 2023.

The Export–Import Bank of Korea

On August 25, 2023, DNS Korea entered into a Loan Agreement with the Export–Import Bank of Korea (the “Export–Import Bank Loan”). The Export–Import Bank Loan consisted of a short-term loan in the amount of KRW 5.0 billion ($3.8 million USD) with interest payable monthly at an annual rate of 4.8% The Company's debt obligation under the Export–Import Bank Loan was KRW 5.0 billion ($3.7 million USD) as of September 30, 2023.

JPMorgan Credit Agreement

On February 9, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) by and between the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement originally provided for revolving loans (the "Revolving Credit Facility") in an aggregate principal amount of up to $30.0 million, up to $15.0 million of which is available for letters of credit, and was scheduled to mature on February 9, 2024. The maximum amount that the Company can borrow under the Credit Agreement is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments, plus $10.0 million.

On May 27, 2022, the Company entered into a First Amendment to Credit Agreement (the “Amendment”), which amends the Credit Agreement dated February 9, 2022 with the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent.

The Amendment, among other things, (1) provides for a term loan (the “Term Loan”) in an aggregate principal amount of $25.0 million with a maturity date of May 27, 2027, (2) extends the maturity date of the $30.0 million Revolving Credit Facility to May 27, 2025, (3) permits the ASSIA Acquisition, (4) modifies the applicable margin for borrowings under the Credit Agreement to be, at the Company’s option, either (i) the adjusted term SOFR rate plus a margin ranging from 3.0% to 3.5% per year or (ii) the prime rate plus a margin ranging from 2.0% to 2.5% per year, in each case depending on the Company’s leverage ratio, (5) modifies the letter of credit fee such that it ranges from 3.0% to 3.5%, depending on the Company’s leverage ratio, (6) modifies the commitment fee on the unused portion of the Revolving Credit Facility to range from 0.25% to 0.35% per year, depending on the Company’s leverage ratio, (7) modifies the method of calculating the leverage ratio, and (8) modifies the financial covenants to (i) increase the maximum permitted leverage ratio to 3.00 to 1.00 through September 30, 2022, 2.50 to 1.00 thereafter through September 30, 2023, and 2.00 to 1.00 thereafter and (ii) replace the minimum liquidity requirement with a minimum permitted fixed charge coverage ratio of 1.25 to 1.00.

On May 27, 2022, the Company borrowed the full amount of the Term Loan to finance the ASSIA Acquisition.

On February 15, 2023, the Company entered into a Second Amendment to Credit Agreement (the "Second Amendment"), which amends the Credit Agreement dated February 9, 2022 (as previously amended on May 27, 2022). The Second Amendment, among other things, (1) modifies the financial covenants to (i) suspend the maximum leverage ratio requirement of 2.50 to 1.00 until the fiscal quarter ending September 30, 2023 and (ii) suspend the minimum fixed charge coverage ratio requirement of 1.25 to 1.00 until the fiscal quarter ending December 31, 2023, (2) adds new financial covenants to require (i) minimum liquidity of $30.0 million for the fiscal quarter ending March 31, 2023, $35.0 million for the fiscal quarters ending June 30, 2023 and September 30, 2023, and $20.0 million at any time until September 30, 2023, and (ii) minimum EBITDA (as defined in the Credit Facility) of ($1 million) for the fiscal quarter ending March 31, 2023 and $1 for the fiscal quarter ending June 30, 2023, (3) increases the applicable margin for adjusted term SOFR borrowings and prime rate borrowings to 4.0% and 3.0%, respectively, when the Company’s leverage ratio exceeds 2.50 to 1.00, (4) increases the commitment fee on the unused portion of the revolving commitment to 0.40% per year when the Company’s leverage ratio exceeds 2.50 to 1.00, and (5) prohibits dividends and other distributions and tightens certain covenants.

On May 8, 2023, the Company entered into the Third Amendment to the Credit Agreement (the "Third Amendment"), which amends the Credit Agreement dated February 9, 2022 (as previously amended on May 27, 2022 and February 15, 2023). The Third Amendment, among other things, (1) modifies the financial covenants to eliminate the minimum EBITDA (as defined in the Credit Facility) of ($1 million) for the fiscal quarter ending March 31, 2023, (2) decreases the calculation of the borrowing base by $5 million through June 30, 2023 and an additional $5 million thereafter, (3) reduces the amount of the Revolving Credit Facility commitment to $25 million effective June 15, 2023, and (4) increases the applicable margin for adjusted term SOFR borrowings and prime rate borrowings to 4.5% and 3.5%, respectively, when the Company’s leverage ratio exceeds 2.50 to 1.00.

In the third quarter of 2023, the Company repaid the Term Loan outstanding under the Credit Agreement and subsequently terminated the Credit Agreement, including the Revolving Credit Facility, on December 14, 2023. In conjunction with the debt restructuring, the Company recorded $0.4 million loss on extinguishment of debt.

As of December 31, 2022, we presented our long-term debt obligation within the current portion of long-term debt due to the risk of non-compliance with certain financial covenants in the next 12 months

The future principal maturities of the Company's debt obligations for each of the next five years was as follows as of September 30, 2023 (in thousands):

Remainder of 2023	$	67
2024	10,998
2025	—
2026	—
2027	29,291
Total	$	40,356